Countrywide workout: Partial foreclosure freeze, 3.5% rates

Under the $8.7-billion loan workout program that Bank of America will announce today for Countrywide borrowers, interest rates will be slashed as low as 3.5% for some borrowers, and foreclosures will be frozen for thousands of borrowers who might qualify.

Highlights from the Los Angeles Times:

An estimated 125,000 Californians who are struggling with risky mortgages from Countrywide Financial Corp. may get their loans modified and payments reduced under a program to be announced today.

... Bank of America said Countrywide mortgage-servicing employees would be trained to carry out the program by Dec. 1 and would then begin reaching out to eligible customers. The plan includes a foreclosure freeze for borrowers who are likely to qualify until Countrywide has determined their eligibility, the bank said.

... The program will first identify customers who have fallen behind on their mortgages by more than 60 days or are likely to do so because of loan features such as rate or payment increases, said Benjamin Diehl, a California Department of Justice attorney. These customers will be contacted by Countrywide starting Dec. 1.

Various options will be considered for eligible customers, with employees handling the workouts instructed to first consider refinancing into a fixed-rate Federal Housing Administration loan, Diehl said.

The options on subprime mortgages also include keeping the initial rate for five or 10 years, having the borrowers pay interest only and reducing the interest rate to as low as 3.5%, Diehl said.

Two cents: Who says you can't get a good loan these days? As long as you've already got a bubble-vintage subprime loan, there are all kinds of good options available.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.

Comments

[xtine]

I've wondered why the banks haven't done this sooner. It costs them much more in lost revenue and administrative fees to short sell or foreclose than just making the interest lower, which is the bank's right. The interest is their profit. If they're willing to lower it, let them.

Folks who can't pay their mortgage still won't be able to, folks who can, will. Principal will remain the same, so they won't be getting a HELOC any time soon, and if some bad debt turns good, some of those securities will upgrade.

Seriously, I know you will be PO'd, but this is not all that bad.

[SoCalJim]

This will only delay the inevitible. This is the worst economy in my lifetime, and if those people are having problems now, that means they have (maybe) one month of savings or live paycheck to paycheck. As a result, they will continue to drudge along the bottom, until it breaks, forcing them to sell as they should have a long time ago but didn't b/c of their greed and/or ignorance. This is a simple fact. For those who can make it for more than 30 days at a time, they know their house is much less valuable compared to when they bought it, and they are probably underwater. So they are stuck, or walk away, ruining their credit for years. Another simple fact. This is how it is with the middle class that struggles month to month. Always has been, always will be. The upper class, in contrast, can ride it out, as has been the case in the past. Eventually, Countrywide will realize this, and will realize that these attempted "fixes" were not really fixes at all, but only cost Countrywide more money since it delayed foreclosure, and as a result of that delay, the house is now worth even less than it was six months ago.

And for those who think housing will turn around in the short term - you either live in a cave or are simply blinded by your necessity for RE commissions or ignorance. I went to one open house this weekend. House was in a very nice neighborhood with great schools. Price reduced 100k to 800k. Realtor admitted that I was the only person to look at the house the entire day. If that does not speak volumes, I don't know what does, maybe the Dow breaking 10k, or firms that have been around for 100-150 years going under b/c of BAD MORTGAGES.

Wake up people. Lala land is not fantasy land. Simple economic principles still apply - i.e., if you can't afford it, you won't have it for long (just like idiots who lease expensive European cars rather than buying a moderately priced JP car).

We are now seeing how stupid some people really are. If they lose their house, they probably deserve it and should not have put their family at risk. There are plenty of families that rent, and that probably allows them to live in better areas with better schools for the kids. Why pay 7,000 in property tax and mortage, HOAs, repairs, etc. when you can rent the same or better place for less in a better area? Live and learn. Sometimes, people only learn through adversity, if they learn at all. That is why the middle class stays in the middle... That may sound harsh, but the truth hurts sometimes.

[Cal]

How does any of this really differ from what servicers are doing already? It kind of sounds like more of the same plus throwing in the Hope for Homeowners program.

[150 multiple choice questions]

Smart for them. By them I mean that banks because that's the only people this helps. Keeping people in a house that's 50% under water (you'll know when they reach out to you) and paying 3.5% on that cost basis is a bankers dream. (notice they're not modifying the amount of the loan) Plus, since americans can't manage 6th grade math, BofA will get tons of positive publicity.

[Doug in Toronto]

I wonder how all those Countrywide mortgage holders who have already lost their homes feel about this.

[tarbubble]

must...not...beat...head...against...wall...

[tew]

For all the talk of how "the" "bailout" (*) benefits big bankers at the expense of the little guy there is still very little in the media about perhaps the biggest story: The transfer of wealth from savers and prudent investors to speculators and criminals. All in the name of "the system".

The government is holding up a banner with huge letters "SAVERS ARE SUCKERS".

We're still in denial. Folks, it's a "from each according to his thrift" deal now. Your savings are an illusion. The more you save, the more you owe. It's going to get close to 1 to 1 - each dollar saved is a dollar of subsidy removed.

If you do the math you'll find that if you save for a downpayment and qualify for a jumbo (and thus are in a very high income tax bracket) then your after-tax, after-housing payments income will be no higher than that of a lower income subprime borrower with a modification. They'll have the same house, same cars, same spending power.

* Note both quotes. There is no single bailout. Bailouts began intensifying last year. For example, Congress eliminated tax on forgiven (defaulted) debt for home borrowers while continuing to allow banks to deduct losses on those same loans. That is a large direct hit to the Treasury.

[TakeFive]

May slow the rate of foreclosure a little, but that’s about it. The psychological factors are too strong. Let’s see: I get to pay 3.5% interest for my $400K home in Riverside, or I can dump it and buy the same model for $180K and possibly pay it off in 15 years.

I think we’ll find out that people who claimed not to understand loan documents suddenly become very financially savvy.

[Tim K.]

A bit off topic, but Peter, perhaps you can contact some of those folks (like milla) who bought homes in the past year or so and do a follow up story.

You had a few stories of folks under the title "who's buying now" and I remember them stretching to get into a house now because it was personally worth it to them, even though they admitted perhaps it wasn't the most prudent decision financially.

It would be most interesting to see if they still felt that way, if they are glad they did not wait and bought when they did.

[Lou]

Dow below 10,000. Wow, that bailout is really working!

[Giacomo]

This is not substantive, it's just another PR move. They just want appear empathetic. The statement is full of ambiguous positions which add up to one thing: they will do whatever they think is in the best interests of their company, whatever that turns out to be. If they postpone some foreclosures, or rewrite some loans at a lower interest rates, it's because that's what they were going to do anyway.

"as low as 3.5%" or "will be considered for eligible customers" -- these are the types of phrases we should all be familiar with from advertising (i.e., "up to 50% OFF!"). Meaningless.

[TC]

Interest only at 3.5%?? Initial rate for 5-10 years?? And all this on a home priced at 2006 bubble peak??

Sounds like "rent to foreclose later".

It's a nice scheme to keep people in their homes and the banks with less foreclosures, but chances are the homes will still be under water in 5 years and the folks who chose to stay will still be screwed.

[julie]

"notice they're not modifying the amount of the loan"

I think I read that there may be principal reductions, that the loans might be rewritten to something like 95 percent of the appraised value...not sure how plausible that is, though.

[OverIt]

Yes, that's it - drag this out as long as possible. I understand one of the provisions is forbearance for up to 10 years. A great idea that has been proven time and time again to not work.

At this point it looks like we're in for an amazingly prolonged Japan type recession that has plagued them for the last 15 years.

Get ready for a very different U.S. of A.

[MyLessThanPrimeBeef]

Well, Manhattan real estate is down. Can Manhattan Beach be far behind?

[Scott]

Why work to maintain good credit? Default on your loans and get a 3.5% rate. I'd also demand that they roll in your high rate CC and auto debt into the refinancing. It looks like being a big risk and having bad credit is the way to go these days.

[moppy]

This is going on with million dollar plus homes and the people living in them can afford to pay after the modification. The people that lied on their applications took out these loans are scoring big time here.

Some of you are trying to make yourselves feel better by writing about people that can't afford to pay anything. In fact the modifications are working for many people quite well. They get to live in a nice house, own it, resale it in years to come, pay a mortgage amount the same as rent...great deal. Regardless when the market picks up and it will one day, they own an asset. And the mortgage they're paying on it is equivalent not to the fair market value they paid but the market value it was in 2000. Great Deal.

We're the suckers, don't you forget it!

It's all really rather disgusting...

Bye Bye Miss American Pie!!!!!

[Fermi Pyle]

It doesn't work unless mortgage servicers can cut principle balances for existing loans. A short sale / foreclosure destroys loan principle with a new owner. Changing owners consumes 5 to 10 percent loss in transaction fees alone, plus properties sold this way are usually damaged from neglect or vacancies, adding price declines. Many short sales / forclosures hit people who could afford payments on their current house at today's price. Turning an upsidedown defaulting loan into a performing loan with existing owners saves everyone money.

[jag]

Bailouts, loan modifications and all other programs are basickly designed to keep home prices high. Did the government and banks completely forgot about the new home buyers? It appears that all they want to do is keep the same idiots who purchase a home at an inflated price in their home by any means.

[E]

The banks aren't going to work with the Million $ home club.

They are chomping at the bit to get their hands on these homes I'll bet.

Remember...the owners of these homes are the ones that "moved up" with a nice fat downpayment from the equity from their previous bubble sale.

2004. 400k down on 1MM house with a 600k option ARM.

2007. Owner thinks he won the lottery. Puts house on market for 2MM. It sits and sits.

2008. Loan is resetting and the homeowner is now asking 1.4MM+ to avoid foreclosure.

Bank forecloses on house. Sells for 700k (that's 50% off asking for those keeping score at home) and still recoups entire loan balance. Maybe even more.

It's cheaper (and more profitable for the banks) to kick the bums out. Simple math.

[MyLessThanPrimeBeef]

Let me get this straight.

Companies like GE can't borrow this morning as there are bids only on the LIBOR market, but if you are subprime, you can re-negotiate your loan from Bank of America @ 3.5%?

[CompaJD]

I wonder what people who gave 20% down and are keeping up to date with their payments feel about this?

[Drew]

Did the sun rise in the west this morning? Geez Loo-weez!

[Radiomantodd]

This is starting to get ridiculous.

My wife and I bought in July 2007. Why? Because we knew that we were "sub-prime" (I had a lower credit score than I do now) and were gonna have to do a "Stated Income" loan on our first, and do 100% financing. Now, make no mistake, we did not misrepresent ourselves when it came to income. If anything we understated it. We got a 30-year fixed rate, no ARM, no Teaser. We just had to do 100% financing on an 80/20 deal, and knew that our time was then or never.

So here we are, in a nice townhome that we love, but we're 100K in the hole in just over a year (hard to say... no open market sales in our Santa Clarita development.... all been foreclosures or short sales) and we're paying 6.75% interest.

So why shouldn't we default, and get our rate slashed nearly in half? Whats in it for us, the responsible borrowers who borrowed what we could afford to pay and signed off on terms we knew up front?

Answer: Nothing.

[JS]

A key point in this is that, on the national average of $21,750, and the California average of $28,000, there will not be a wholesale re-writing of principal values and reductions in mortgages. Consider homes in CA were averaging $500,000+ in that time period here, this amounts to roughly 5% of the principal. Statistically, this is meaningless, given homes have fallen 20%+ since Countrywide’s peak.

But it does get the State of California off Bank of America’s back, and it will give Jerry Brown something when he’s running for Governor, another meaningless sound bite.